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St James's Place: smoke, mirrors, or accounting overload?
14/03/2017 , Ian Orton

Warren Buffett’s most recent chairman’s letter to the shareholders of Berkshire Hathaway included a diatribe directed at firms that highlighted “adjusted” rather than “statutory” earnings, i.e. earnings and profits calculated on a Generally Accepted Accounting Practice (GAAP) or International Financial Reporting Standards (IFRS) basis.

One wonders what Mr Buffett would make of the annual accounts of Cirencester, Gloucestershire-based St James’s Place, one of the UK’s biggest wealth management firms.

Like an increasing number of its peers St James’s Place is very keen on focusing attention on “underlying” rather than “reported” accounting data when it comes to analysing business performance.

The problem is, however, the sheer volume of accounting data presented by the firm and the rather idiosyncratic way this is treated in generating annual income, revenues and pre-tax profits on a “reported” let alone an “adjusted” basis.

And for good measure St James’s Place also insists on providing accounts drawn up on an IFRS as well as an European Embedded Value (EEV) basis as well.

This means that when it comes to announcing its financial results in the form of a press release St James’s Place lurches between EEV and IFRS data.

Take the press release issued on 28 February when the firm published its 2016 financial results.

New business profits, operating profits and net asset value per share are all quoted on an EEV basis. It then appears to adopt an IFRS stance in reporting pre-tax profits.

Except, of course, that the pre-tax figure is not quite the relatively straightforward measure it is at other firms. For at St James’s Place the pre-tax profit figure of £140.6 million refers to “profit before shareholder tax”.

What is “shareholder tax"? It is probably corporation tax but this doesn’t appear to be definitive, at least not based on an admittedly quick read of the chief financial officer’s report along with the accounts.  

Furthermore the press release then goes on to highlight both the “operating cash” and “underlying cash” results post tax.

An examination of the statutory income statement or “consolidated statement of comprehensive income”, together with the accompany notes to the accounts, is usually sufficient to resolve these and other definitional problems.

But this isn’t the case at St James’s Place.

Take the manner in which it reports income, for example. In addition to insurance premiums and fee and commission income St James’s Place also includes investment returns.  

On the expenses side net policyholder claims and benefits, net changes in insurance contract liabilities and investment contract benefits and “expenses” are all lumped together.

Subtracting expenses from income does generate a pre-tax profit of £486.3 million for 2016, a significant increase on the £174.1 million reported for the previous year.

But this excludes £345.7 million of “tax attributable to policyholders’ returns”. Net this from the £486.3 million of “pre-tax profit” and this gets to the £140.6 million of “profit attributable to shareholders,” presumably the equivalent of pre-tax profit at any other firm.

Perhaps not surprisingly there is a significant amount of space devoted to taxes as far as the notes to the accounts are concerned. Note 7, for example, which deals with “Income and Deferred Taxes” extends over four pages.

Still tax will not be the most relevant metric to anyone interested in the anatomy of St James’s Place. Revenues, along with their sources, are much more important.

And St James’s Place certainly generates revenues from a lot of sources as Note 5 to the accounts explains.

Revenues sources include advice charges (£510.7 million in 2016), third party fee and commission income (£103.5 million), wealth management fees (£590.7 million), investment management fees (£52.6 million), fund tax deductions (£352.2 million) and courtesy of the Rowan Dartington acquisition discretionary fund management fees £5.3 million).

Deduct £88.9 million to account for the amortisation of DIR and this produces a total fee and commission income of £1,703.9 million, £370.4 million or 27.78 percent more than the £1,333.5 million reported for 2015.
 

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